"Football
has it. Basketball just got it. Hockey and baseball need it. What
is the "it" I'm referring to? No, not rickets. I am talking
about salary caps. A salary cap is a limit on how much a team can
spend on players. Depending on the loopholes, salary caps have a tremendous
effect on how sports teams recruit and hire its players."-Chris Lindsay, freelance columnist

To explain salary
caps, start with the name. A "salary cap" is not actually
a cap on individual salaries but a payroll or cost-of-labor cap. The
managers of the various franchises meet and agree to inhibit the labor
market by refusing to spend more than a certain, pre-determined amount
on payrolls, often less than some franchises already dole out. Some
sports do have some sort of cap on individual player salaries, but
these are typically set up with a number of exemptions and exceptions
to get around the rule. For example: the NHL limits the salary of
rookies and players under a certain age but doesn't restrict performance
bonuses to them. The NBA has individual salary limits in place but
there are so many ways around them that they are rarely a factor (more
on this later). The net effect of the types of caps currently in use
is to put more money in the hands of owners and less in the hands
of labor: the players.

There are two
broad types of caps: the "soft" cap and the "hard"
cap. The NBA features a soft cap (interestingly one of the primary
architects of the NBA cap is current NHL commissioner Gary Betteman).
The NFL has a hard cap. What's the difference? From the FAQ for the
NBA salary cap: "The NBA has a soft cap. A hard cap doesn't allow
the cap to be exceeded for any reason. A soft cap, which the NBA has,
contains exceptions under which a team can be over. In fact, historically
very few teams are ever under the cap during a season."

Soft Cap:
The National Basketball Association

Basketball had
a cap in 1946-47, gave it up, and then implemented the current version
(more or less) in 1984-85. The current NBA cap limits payrolls of
NBA teams to 55% of Basketball Related Income for the league. The
figure will rise to 57% in 2004-05, the last season of the Collective
Bargaining Agreement (CBA), and can be terminated if the average NBA
player salary drops below the average NFL, NHL or MLB player salary
(among other reasons). Basketball Related Income (BRI) requires some
complicated math but it includes revenue from tickets, advertising,
local concession and souvenir sales, local media and other league,
team and arena income streams. In 2001-02 the cap was set at $42.5
million. Two teams, Detroit and the LA Clippers were under the cap;
Detroit by $800,000 and the Clippers by $8.8 million. The 28 other
teams were all over the cap, 16 teams by more than $10 million, and
2 teams by more than $40 million (Portland and the New York Knicks).
The reason teams were able to exceed the cap by so much is because
many of the exceptions (including the famed "Larry Bird Exemption")
apply to players who do not exercise their free agent rights or who
remain with the same team for more than a couple of years. The NBA
claims that "The basic idea is to try to promote the ability
for players to stay with their current team. Nobody likes it when
a player plays with a team his entire career, the fans love him, he
wants to stay and the team wants to keep him, but he has to leave
because the team is unable to offer him a large enough contract."

The NBA also has
a "luxury tax" in effect. If average salaries league-wide
for a season go over the agreed upon limit (55% of BRI) then there
is an escrow fund (composed of 10% of player salaries) held back from
players' paychecks that is reimbursed equally to franchises (thereby
reducing the amount teams spend on player salaries) until the 55%
limit is restored. If the 10% escrow fund is not sufficient, then
the highest spending teams (the ones assumed responsible for the salaries
being so far over the limit) are taxed the remaining amount to reimburse
the other owners. Player salaries are also capped depending on tenure
in the league, but there are so many exceptions to this rule that
it rarely has a major impact on the salaries of star players, the
ones the true cap on salaries is supposed to affect. Obviously the
NBA salary cap and luxury tax structure are not overly constraining
and therefore qualify as a soft cap. As NHL commissioner Gary Betteman
was the primary composer of the 1984 NBA deal, the expectation is
that he will press for something similar in the NHL.

Hard Cap:
The National Football League

The NFL cap is
often called a hard cap. It was introduced in 1994 and operates on
many of the same principles as the NBA cap. It limits franchises from
spending more than 63% of the League-determined Defined Gross Revenues
(DGR, similar to the BRI of the NBA). The cap was calculated at roughly
$67.4 million for the2001-02 season. This seems to be much more than
the NBA cap, but remember that NFL teams have an average of 57 players
on the roster as compared to under 17 in the NBA. Despite the cap
on payrolls, player salaries have continued to rise since 1994, and
at a rate outpacing the growth rate of the DGR number. Because of
this teams have scrambled to find ways to circumvent the cap (there
are no obvious loopholes written in) so that they can keep/sign good
players. The primary way that this is done is through guaranteed signing
bonuses, sometimes as large as 2 or 3 times the average yearly salary
on the contract, that are spread over the life of the contract when
determining cap numbers. For example, a player signed for $1 million
per year for five years ($5 mil total) is given a $10 million signing
bonus (paid when the contract is signed). When calculating the impact
on the salary cap, though, the player does not count $11 million the
first year and $1 million per year thereafter (the way he is paid),
he can count as $3 million each year of the contract (($10 mil +$5
mil) / 5 years). The upside for the player is that he is guaranteed
$10 million (as NFL contracts can be terminated by the team at any
time, unlike in other pro sports). The team gains because they get
to spend to attract a star player but don't lose a huge chunk of cap
space. The major downside happens if the player is injured, cut, traded
or retires in which case the bonus still counts against the team even
though the player isn't there, and is accelerated to be paid entirely
in the current year. If the player in our example suffers a career-ending
arthritic big toe after the first season, the team loses $8 million
of cap room for year two of the contract. This so-called "dead
money" has become the bane of many an NFL franchise.

During the 2001-02
NFL season 18 of the 31 teams spent more than the $64 million salary
cap thanks to the signing bonus and deferred money. 7 teams were more
than $10 million over the cap, 2 were $20 million over and 1 (Denver)
was $48,000 shy of being $30 million over the cap. At the other end
of the scale, 2 teams (Dallas and Washington) were more than $10 million
under the cap because they were weighted down with "dead money".
The NFL salary cap seems to make each team's spending from year to
year look like a sine wave: it goes well over the cap for a couple
of years, then drops well below it for a couple of years to compensate,
then jumps back up as soon as cap space appears.

The National Hockey
League does not have a salary cap of any sort, but the existing NHL
CBA contains clauses that limit the minimum compensation for all players
and the maximum entry-level compensation for players under the age
of 25. Article 9 of the NHL CBA limits the maximum yearly compensation
for rookies to just over $1 million in salary and 50% of that in signing,
reporting and roster bonuses. Performance bonuses are not affected.
After a length of time determined by the age of the player when the
first contract was signed (not exceeding three years) the limits come
off. This clause allows the NHL to avoid many of the problems that
the other leagues experience with regards to getting rookies signed.
Major League Baseball has had cases where lower-payroll teams draft
inferior players in the early rounds because they know that they won't
spend what the high rated prospects' agents demand. While there are
rookie holdouts and unsigned draft picks in hockey, it's typically
not due to affordability.

Revenue
Sharing and Payroll Taxes

Revenue sharing
is the current hot topic in MLB and is reportedly being considered
for the NHL as well. The details of revenue sharing plans vary greatly
but the basic principle remains the same: determine the most profitable
franchises, take portions of their revenues, distribute these funds
to less profitable franchises. Often the revenues to be shared are
those from local TV/radio contracts. The value of those deals depends
heavily on the demographics of the area surrounding each franchise
and, as such, are "dumb luck" revenues not greatly affected
by skillful or poor management. Wealthier owners have obvious reasons
for opposing significant revenue sharing, not least because under
existing plans small market owners have been known to simply pocket
the shared money rather than use it to improve their team. The MLB
agreement of last summer increased the amount that the richer teams
will contribute to the poorer teams from $169 million to $258 million,
and the rich ones will also have to contribute 34% of locally generated
revenues, up from 20%. Players tend to shy away from revenue sharing
as it can limit player salaries, although they regard it as a lesser
evil than a salary cap.

A variation on
revenue sharing is the so-called "luxury" or "payroll"
tax. Under this scheme teams that spend more than a certain amount
on payroll are assessed fines for every dollar they spend over the
soft ceiling. Typically the rate is rather steep, even as much as
a direct 1-1 ratio. The fines are distributed to poorer teams. These
payroll taxes raise the same issues as standard revenue sharing, but
also are seen to be semi-ineffective in limiting big money teams.
If a team can afford to exceed a hypothetical $50 million ceiling
by $3 million to sign a key player, they can typically afford the
$1-$3 million fine that would accompany it. The New York Yankees originally
stated that they would get under the luxury tax threshold that was
instituted during the MLB crisis last summer (approximately $117 million).
An off-season of chasing Japanese free agents later they are pushing
the $160 million dollar line and have not yet signed all of their
players. They will pay at least 20% of the overage as a penalty, but
don't seem to mind. Luxury taxes are seen as more palatable than revenue
sharing by most observers because they are seen as only punishing
the very rich and even then only if the rich deliberately spend more
than agreed upon limit.

One method to
assuage fears that the beneficiaries of revenue sharing/luxury taxes
simply pocket the majority of the proceeds is the minimum payroll,
something generally not found in pro sports. If a maximum allowable
payroll is established through a cap (hard or soft), a tax cut-off
line or any other method, some owners fight to include a minimum payroll
level. This is to ensure that smaller market teams don't simply adjust
their payrolls downward in response to the lowering of the maximum.
The players unions support this balancing mechanism as it ensures
that a minimum wage for a team is established as well as a maximum
thereby guaranteeing that the players will continue to receive a reasonable
piece of the pie.

All these methods
of reigning in team payrolls have different effects, positive and
negative, on the leagues where they have been implemented. Theorizing
about what they will do is all fine and dandy, but the real life reaction
may not be what was planned.

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Copyright Matthew
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